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August 5, 2011

Bernanke’s Forecasts Scrutinized Over Accuracy

Of 12 Fed staff forecasts since the beginning of 2010, seven have been downward revisions

Ben Bernanke at one of his recent press conferences. (Photo: AP)

Many Americans are aware of the so-called Beige Book, a report of anecdotal information compiled by the Federal Reserve eight times each year and released just before FOMC meetings. But what about the Teal Book, a confidential compilation of forecasts “for Fed eyes only?”

Bloomberg reports the Teal Book is now the focus of intense scrutiny, which has heightened in recent weeks with revelations that a weak economy may be getting weaker.

“Chairman Ben S. Bernanke and his Federal Reserve colleagues are preparing to meet next week as two-year Treasury yields near a record low signal a U.S. economy on the knife’s edge between growth and contraction,” according to Bloomberg. “Guiding their assessment of the outlook for the world’s largest economy will be forecasts contained in the so-called Teal Book, a confidential staff report with a blue-green cover. Policy makers’ confidence in those forecasts may be tempered as the course of the expansion has confounded their expectations.”

Bloomberg, citing the minutes of FOMC meetings, notes that of 12 Fed staff forecasts since the beginning of 2010, seven have been downward revisions to the near-term outlook. This year alone, the outlook was raised in January and lowered three times, putting increased pressure on Bernanke and his staff over the effectiveness of their economic models.

“We haven’t had any historical event that really would allow us to reliably statistically calibrate an event like the one we’ve had,” David Stockton, director of the Fed’s Division of Research and Statistics, who has overseen forecasting for a decade, said in an interview with Bloomberg. “There isn’t going to be a simple story here.”

Uncertainty can cause central bankers to keep their hands off the levers of monetary policy and wait for more information, Antulio Bomfim, senior managing director at Macroeconomic Advisers LLC in Washington. “When risks to growth stack up, as is the case now, Fed officials have to be mindful of more severe scenarios rather than just their baseline outlook,” he told the news service.

In an example of contradictory comments made recently by Bernanke, as recently as June 22 he said there was no plan for another round of government stimulus, also known as QE3. Less than a month later he testified before Congress and floated the possibility of more stimulus.

The catalyst, he said at the time, was the downward revision of recent forecasts and the incorporation of weak employment figures, which indicated an increase in national unemployment to 9.2%. Unemployment figures released Friday show the number has improved slightly to 9.1%.